Valuation Effects - Valuation Effects and The U.S. Current Account Deficits

Valuation Effects and The U.S. Current Account Deficits

Valuation effects have been increasingly important for the U.S. in the last two decades, given a dramatic, sharp rise in international cross-country portfolio holdings. For the U.S., valuation effects are partly compensating its current account deficits and therefore mitigating the decline of its net foreign assets.

During 1994-2007, the U.S. accumulated more than US$5 trillions in current account deficits. This figure will be rising at least in 2009 and 2010. The phenomenon understandably raises a lot of concerns about the size of the U.S. external debts, because a high, unsustainable external debt can result in painful debt service and/or sharp currency depreciation.

New evidence, however, suggests that while the U.S. has been experiencing large, persistent current account deficits, the assets U.S. investors hold overseas are gaining more in value compared to the value of U.S. assets held by foreign investors. These positive valuation effects represent financial gains for the U.S. (some attribute this phenomenon to exorbitant privilege). Economists at the Federal Reserve estimated that during 1994-2007, the U.S. valuation effects (in stocks and bonds) are about +$1.2 trillion, about 22% of the U.S. total current account deficits,.

Read more about this topic:  Valuation Effects

Famous quotes containing the words effects, current, account and/or deficits:

    Like the effects of industrial pollution ... the AIDS crisis is evidence of a world in which nothing important is regional, local, limited; in which everything that can circulate does, and every problem is, or is destined to become, worldwide.
    Susan Sontag (b. 1933)

    You will belong to that minority which, according to current Washington doctrine, must be protected in its affluence lest its energy and initiative be impaired. Your position will be in contrast to that of the poor, to whom money, especially if it is from public sources, is held to be deeply damaging.
    John Kenneth Galbraith (b. 1908)

    To develop an empiricist account of science is to depict it as involving a search for truth only about the empirical world, about what is actual and observable.... It must involve throughout a resolute rejection of the demand for an explanation of the regularities in the observable course of nature, by means of truths concerning a reality beyond what is actual and observable, as a demand which plays no role in the scientific enterprise.
    Bas Van Fraassen (b. 1941)

    Don’t forget what I discovered—that over ninety percent of all national deficits from 1921 to 1939 were caused by payments for past, present, and future wars.
    Franklin D. Roosevelt (1882–1945)